Do you know someone who has lost their job in the last few years working in IT, media, finance or retail? These industries and many others are already feeling the pinch of “online gravity” – a special set of economic forces and drivers that increasingly govern business in the age of the web.
Much has been made of the disappearance of jobs due to the digitisation, automation and networking of many traditional industries — most notably in traditional media. But careful global economic analysis has shown the internet has in fact added more jobs than it has destroyed.
According to McKinsey and Company the internet has created 2.6 new jobs for every 1 deleted. What’s becoming increasingly apparent however is the location and setting for where these new jobs appear is often not the same for those which were lost.
Online, business today is being influenced by a different set of economic forces than those that exist purely offline. I call these forces “online gravity” – not unlike the forces that led to the formation of our solar system.
These forces favour the creation of planet-like superstructures with lots of white space in-between. In a former article (Why there’s no Pepsi® in cyberspace) I outlined this phenomena and here I examine how Online Gravity is reshaping the future of work.
Online gravity means more centralisation
In the new digital economy, more and more companies are able to centralise their employment around their headquarters. This has potentially profound consequences for the future of employment everywhere that have yet to be fully understood.
Before the rise of the web in 2000, leading global companies such as Dell, the Personal Computer manufacturer based in Texas, or Westfield, the Retail Property Group in Sydney typically employed one in five, or 20% of their total global employees in their hometown headquarters.
This is great for the regional economies fortunate enough to call these companies home as the company headquarter jobs are generally higher paid, more global in scope and typically include roles in global marketing, global finance, research and development that are not found outside of HQ.
In the past there was a natural limit to the concentration of companies around their HQ. As global companies grew, regional headquarters necessarily emerged.
Previously, companies typically became more decentralised as their geographic expansion unfolded, driven by the twin needs:
- to increase the sales of the company by selling in every territory possible and
- to decrease the cost by making things wherever it was cheapest.
Increasing the sales in every territory had an unintended consequence I refer to as the “Jaguar effect”.
In the enterprise software business and many others where the products and services are expensive, complex and require a high degree of trust and confidence in the vendor, a local very talented and socially connected team in every market has been required to sell the products face-to-face.
And Goodbye to Jaguar jobs
From the point of view of expanding or aspirant new global companies, this traditional expansion route required a fleet of “Jaguars” in every major market you intended to serve, and talented team of local managers and sales executives to drive them. But now the days of these Jaguar jobs are numbered.
In digital economy enterprises such as personal computing software leader Microsoft, around 40,000 or 40% of its total global workforce of 95,000 employees are concentrated in or around its headquarters in Seattle.
In online media and services, this figure climbs significantly to between 40-80% of the total team. Younger and early stage companies such as Facebook, LinkedIn, Atlassian and Zynga have well over half their employees in their city of initial establishment.
Amazon has developed a famously efficient centralised global e-commerce enterprise that ships to and trades in 66 countries around the world from Argentina to Venezuela yet without the need for the need for local operations, sales or distribution staff in most of these locations.
Research based on current LinkedIn data indicates over 91% of Amazon’s 88,000 staff are located in only six of the countries where it has significant on-the-ground operations: US, UK, India, Ireland, China and Canada.
Similarly, Google, Facebook and most other online global ventures trade and derive revenue from customers in most countries around the world, yet have staff and on-the-ground operations in only a select few of these.
As a new generation of companies like Sydney-based Atlassian and Austin and Sydney-based BigCommerce have clearly demonstrated, without the expense of global field sales staff you can not only sell and support consumer services online but also enterprise solutions – globally and online from one or two well-resourced hubs.
This is increasingly important for policy makers as it means unless your city, region or country is home to and fosters the creation of global digital economy enterprises, the number of high-value jobs available in your area is likely to shrink dramatically over the next decade.
And it’s not just “traditional” industries where jobs are at risk. November’s Harvard Business Review chronicles the long-term decline in employment of America’s information industries.
After manufacturing, the information sector has had the greatest employment contraction of any sector in the US in the past decade.
While online gravity is leading to many Jaguar jobs disappearing in Western countries through the centralisation and automation of many online services its not all bad news for the developing world.
The World Bank has made the point in its recent report “Connecting to Work” the rise of open global online labour market places such as Freelancer.com, oDesk and elance means that once connected to the internet, many people in developing countries can now have direct access to employment opportunities that were previously impossible.
And Hello to Gazelles and Rocketships
MIT economist David L. Birch showed in the 1970s that the majority of national job growth (and losses) in the US came from enterprises with fewer than 100 employees.
Nearly 20 years on, Birch refined his thesis to show not all small businesses are equal, with only 4% of these companies – a high growth cohort he terms “gazelles” accounting for around 70% of jobs created.
Gazelles are companies that routinely demonstrate consecutive, double-digit annual growth and are now seen by many as the engine room of much future economic development.
Follow-on research “Employment effects of business dynamics: Mice, Gazelles and Elephants” by Zoltan J. Acs and Pamela Mueller has identified Gazelles as “only start-ups with greater than 20 and less than 500 employees” and “only in large diversified metropolitan regions”.
Many of these Gazelles, such as Google, eBay and Freelancer.com, are fuelled by the winds of online gravity and also classify as “rocketships”.
“Rocketships” are a new generation of online high growth global enterprises defined as companies that grow from start-up to US$50m in revenue in their first five years of operation. Atlassian, Facebook and Google all fit this definition.
In his 2009 excellent article for the Wall Street Journal, “How Long Does It Take To Build A Technology Empire?” Scott Austin showed a previous generation of global technology companies such as Micosoft, Oracle and SPSS don’t make it into the Rocketship club, having taken between eight, ten and fourteen years respectively to reach $50m of sales.
Employment is being reinvented and jobs being disrupted are reappearing in different settings and new global enterprises around the world.
Policymakers, politicians and parents around the world should be mindful of these changes to best position for employment in a new era of Online Gravity.
Paul McCarthy is an Adjunct Professor at UNSW and director of strategy and innovation at SIRCA Limited. He is writing a book titled “Online Gravity”.